Government

The American Social Security system already confronts insolvency …. it cannot afford to pay all the benefits it has promised

The U.S. Social Security system is a pay-as-you-go system, that is, payroll taxes collected from today’s workers mostly go to pay today’s retirees.

The problem is that, as our population ages, fewer young workers are paying into the system relative to rising numbers of ever-longer-lived retirees drawing benefits. So the reality is that the American Social Security system already confronts insolvency . . . it cannot afford to pay all the benefits it has promised. In other words, past and current Social Security participants have been promised far more in benefits than they will pay in taxes over their lifetimes.


Read more at Philly.com

And no, none of this has anything to do with the misinformation that Congress stole Social Security funds, it did not. It has everything to do with Congress failing to fully fund the promises made by Social Security, ignoring the urging of the Trustees to take action sooner rather than later and failing to tell Americans the truth that higher benefits and changing demographics require higher taxes and/or adjustment to some aspects of the program to fund the Social Security promise. 

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5 replies »

  1. Sorry, the risk is to the taxpayers and beneficiaries – not the politicians. So, investing in treasuries = higher than necessary taxes for the current and next two to three generations.

    Funny thing about investments in toll generating roads, rail, water pipelines, etc. they are taxes of a different type … Items that contribute to productivity, not add to national debt – generally raising incomes and, concurrently, tax revenues. Fail and you are left with the same increased taxes we ended up with anyway.

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  2. When you have a pay as you go system that increases benefits without raising the SS tax you end up with what we have today. A shortage in less than 17 years. When you have less workers supporting each retiree, the system cannot be maintained. When you have workers that made $35 to $45 per hour in the auto industry, replaced by new workers making $15 to $25 per hour in the same industry you will have an imbalance. The SS trustees have given Congress a map to fix the shortage, but Congress just will not do anything. Politicians in the 1980’s thought wage growth would be great enough to overcome any future problems, since this did not happen, taxes will have to go up and the growth in benefits for future retirees will need to be limited to the COLA. No COLA in 2016, but my projected SS benefit at 62 (in 20 months) went from $805 to $833. That is an extra $6,720 over 20 years, plus increased COLA’s. Multiply that by millions of retirees and that adds up to billions of dollars.

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  3. No, the whole point of the 1983 Amendments Act was to DELIBERATELY change it from a “pay-as-you-go” system to a system that would generate surpluses – supposedly for as far as the eye could see (and at least until the end of the 75 year projection period). That is what the Democrats and Republicans, from Howard Metzembaum to Ronald Reagan promised – a little short term pain for some long term gain. I clearly remember Howie waiving a copy of the bill over his head when he returned to Ohio to campaign for reelection while claiming that he almost single-handedly “saved” Social Security.

    It is why your prior post, where to invest the surplus, was so important. Back in 1934, Roosevelt frequently confirmed that no taxpayer subsidy was used, that the system was to be “self-supporting” – stating: “If I have anything to say about it, it will always be contributed, both on the part of the employer and the employee, on a sound actuarial basis. It means no money out of the Treasury.” When Roosevelt found that the initial contribution rate would not sustain the system past 1965 (according to actuarial projections), he responded by reconfirming that he would not support the program unless it was a “… fully self-sustaining old age insurance system.” Reworked, the projections estimated the funding would create a $47 Billion SURPLUS by 1980–with no general revenue financing. Right! Sure!

    So, implicit in all of the actions taken by Congress and various administrations over the years, was a promise to act as a fiduciary with regard to the monies in the trust fund – so that there would be a “sustainable solvency” where reserves would be steady throughout the projection period. It means that the Social Security trustees were to act as fiduciaries.

    Would you say a private pension plan fiduciary met her duties if she invested all of the pension plan assets in low yield, safe treasury securities? You know the answer. They would be lucky to avoid prison, and would be held personally accountable for their failure.

    Perhaps you forget. The objective of the 1983 changes was a substantial increase in the projected trust fund buildup, projected to peak at 544% of annual spending in the early 2020s, resulting in a 75-year projections that foresaw positive trust fund reserves despite annual deficits toward the end of the projection period. The changes included reductions in benefits, a delay and reworking of the COLA introduced in the late 1970’s, higher taxes, taxing social security benefit payments for the first time, reduced early retirement benefits, etc. That 75 year period would be 1983 – 2060 (long after you and I and almost every other baby boomer is dead). Remember, the changes became law almost 20 years AFTER the last baby boomer was born in 1964 – so, it is not like they couldn’t do a reasonable actuarial projection.

    So, bottom line, the 1983 “reforms” didn’t create a “sustainable solvency,” – steady, rather than declining, reserves at the end of the projection period. If the trustees and the politicians are not accountable for these failures, why should we hold ourselves accountable. It is not as if they put the original bill in 1935 or any subsequent change, or even the 1983 Amendments to a vote.

    Again, the solution to the funding shortfall is to allow the workers and beneficiaries to pick their own poison, while otherwise maintaining the existing structure. You’ll get a lot less griping if people get to choose how to fill the funding gap.

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    • Investing in secure treasuries would be okay if the contributions were adjusted as necessary to meet the growing liabilities which of course the politicians are too cowardly to do. I cannot imagine any politician going for any investment with a significant downside risk. Imagine how they would attempt to manipulate the markets just as some are trying to do now with the COLA while ignoring the basic issue.

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